[Ip-health] New competition regimes in India/China

[Rohit Malpani]

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Deals on hold?=0D
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By Sundeep Tucker and Patti Waldmeir=0D
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Published: July 28 2008 19:26 | Last updated: July 28 2008 19:26=0D
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China and India are now so integral to the global financial system that the=
 impact of looming changes to antitrust legislation <http://www.ft.com/cms/=
s/0/0cef08bc-5c09-11dd-9e99-000077b07658.html>  in both countries is sure t=
o be quickly felt across the world.=0D
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China will this Friday implement its inaugural anti-monopoly laws, nearly 1=
5 years after they were first proposed. India, Asia=E2=80=99s other giant d=
eveloping economy, is scheduled to implement tough new antitrust laws in th=
e coming months. The changes find echoes elsewhere in the region, with Hong=
 Kong set to introduce its first ever competition laws <http://www.ft.com/c=
ms/s/0/b67bbdbc-1b7c-11dd-9e58-0000779fd2ac.html>  and established competit=
ion regimes in Japan and South Korea becoming ever more active.=0D
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Only last week, Japan=E2=80=99s Fair Trade Commission raided the offices of=
 four companies on suspicion that they had conspired to increase the price =
of polyethylene sheeting used in insulation materials. But it is the twin d=
evelopments in China and India, each of which is experiencing record levels=
 of cross-border corporate activity, that has set imaginations racing.=0D
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The changes, broadly welcomed in business and political circles, testify to=
 China=E2=80=99s and India=E2=80=99s steady integration into the global fin=
ancial system and its rules and values. At a stroke, China and India will r=
ival the US and the European Union as key global centres for competition la=
w. =E2=80=9CIt is widely expected that China will soon be the third main ju=
risdiction for competition law, together with the EU and US,=E2=80=9D says =
Kirstie Nicholson of law firm Lovells in Shanghai.=0D
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Ignoring the views of Beijing and New Delhi on antitrust issues will soon n=
o longer be possible. Companies will have to ensure they comply with the ne=
w anti-monopoly laws or risk stiff penalties. In India=E2=80=99s case, indi=
viduals face criminal prosecutions and possible jail sentences. But as impl=
ementation looms, there is mounting anxiety in business and legal circles t=
hat the new laws could have unintended adverse consequences, including dela=
ying the completion of global mergers and acquisitions.=0D
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Erik Soderlind, the new head of Linklaters=E2=80=99 competition practice in=
 Asia, says: =E2=80=9CThe competition landscape in Asia and beyond will cha=
nge markedly once the new regimes are in place in China and India. But what=
 impact the new regulations have on business and deal-making will depend a =
lot on how they are implemented.=E2=80=9D=0D
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The new regimes in each country were developed after lengthy consultation a=
nd are broadly based on the EU model, spanning the three main pillars of an=
ti-competitive agreements, abuse of dominance and merger control. Their ado=
ption has been driven by a mixture of motives. In China, policymakers were =
keen to demonstrate that the self-styled socialist market economy has laws =
to protect consumers. India, too, is keen to earn global recognition as a h=
eavyweight economy that is underpinned by rules long adopted in the west. B=
ut Indian agencies have become noticeably more zealous in championing consu=
mer protection issues under the existing, weaker antitrust regime. They hav=
e recently targeted several sectors suspected of cartelisation, namely tele=
communications, cement, airlines, tyre-making, explosives and shipping.=0D
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China=E2=80=99s new anti-monopoly law, which takes effect on August 1, coul=
d be a milestone in the creation of an economy based on law =E2=80=93 or it=
 could merely prove a potent new tool of Beijing-style protectionism. Multi=
national companies are watching closely to see how the law will be enforced=
, worried that it could be used selectively against them and not against th=
eir Chinese rivals. Foreign companies=E2=80=99 access to the fast-growing e=
conomy, and their ability to compete with powerful state-owned monopolies, =
could be riding on it.=0D
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It is unclear exactly what transactions, companies and behaviour will be co=
vered by the Chinese rules, even a year after their legislative passage. Le=
gal experts and big foreign companies had hoped that detailed implementing =
regulations would be published before the August 1 deadline, but it now see=
ms likely that only limited guidance will be available. =E2=80=9CIt=E2=80=
=99s no more vague than the Treaty of Rome,=E2=80=9D says Peter Corne of th=
e law firm Eversheds, chairman of the legal working group of the European U=
nion Chamber of Commerce in Shanghai, noting that it will take time to buil=
d up a body of regulations, rules and interpretations to flesh out what amo=
unts to only a legal skeleton of anti-trust aspirations.=0D
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For many multinationals, the new rules will be an improvement on the status=
 quo in terms of clarity and predictability. The enforcement of new laws in=
 areas such as price-fixing and monopolistic behaviour could also help forc=
e open domestic markets to outside competition.=0D
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In China, member companies of trade associations still commonly meet to agr=
ee prices and business practices =E2=80=93 conduct specifically prohibited =
under the new regime. Yet lawyers warn against viewing the antitrust laws a=
s a panacea. Alison Lindsay of Clifford Chance in Hong Kong says: =E2=80=9C=
The greater certainty which the new laws should bring to this field will no=
t, in itself, create significant business opportunities for foreign investo=
rs. Greater opportunities may come from any parallel process of liberalisat=
ion in restricted sectors.=E2=80=9D=0D
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India and China each restrict foreign investment in sectors ranging from fi=
nancial services to telecoms. But many observers fear an immediate adverse =
impact on mergers and acquisitions =E2=80=93 even for deals that take place=
 largely outside China or India. Detailed M&A regulations have yet to be of=
ficially released in China but, according to leaked reports, companies will=
 have to file for antitrust approval where each has turnover of Rmb400m ($6=
0m, =C2=A330m, =E2=82=AC38m) in China as well as total global turnover of R=
mb10bn or combined turnover in China of Rmb2bn.=0D
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It is a similar story in India. Revised draft regulations published this mo=
nth, which even experienced lawyers regard as fiendishly complex, set out t=
hresholds based on global and domestic turnover which, if met, will make me=
rger filings mandatory. The guidance suggests that for deals involving a la=
rge global company where two of the parties to the proposed tie-up have ass=
ets of $50m in India or annual Indian turnover of $150m, the acquirer will =
have to file for antitrust approval.=0D
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Companies complain that the turnover thresholds in China and India will tra=
p many transactions that have little or no implications for local competiti=
on or consumers. Ranjit Shahani (left), the head of Novartis India who step=
ped down last month as president of the Bombay Chamber of Commerce, says: =
=E2=80=9CIn India, deal sizes are growing larger and turnover is rising qui=
ckly. In that context these threshold levels are set far too low.=E2=80=9D=
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Lawyers predict that big companies anywhere in the world =E2=80=93 even wit=
h limited operations in China or India =E2=80=93 will have to wait for perm=
ission in Beijing and New Delhi before they can complete large global deals=
. From BHP <http://markets.ft.com/tearsheets/performance.asp?s=3Dau:BHP>  a=
nd Rio Tinto <http://markets.ft.com/tearsheets/performance.asp?s=3Dau:RIO> =
 to Microsoft <http://markets.ft.com/tearsheets/performance.asp?s=3Dus:MSFT=
>  and Yahoo <http://markets.ft.com/tearsheets/performance.asp?s=3Dus:YHOO>=
 , the list of companies that could be affected is almost endless. =E2=80=
=9CCertainly such big offshore deals will get a close look in China as else=
where, and it would be reasonable to expect some such deals ... to raise is=
sues requiring a closer look =E2=80=93 and thus some delay =E2=80=93 in Chi=
na as elsewhere,=E2=80=9D says Peter Wang of Jones Day in Shanghai.=0D
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Merger filings in China could be merely a formality; or they could trigger =
significant delays of up to six months before approval is granted =E2=80=93=
 or refused. Unlike in India, it is unclear how the competition authorities=
 in China will treat deals involving private equity or joint ventures.=0D
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Another big question is whether China=E2=80=99s domestic companies will fac=
e equal scrutiny. Up to now, unlike foreign companies, they have had no obl=
igation to file for merger approval. The new law will apply to Chinese comp=
anies but there is a loophole for state-owned enterprises, which still domi=
nate the economy. If Beijing wants to exempt them, it probably can. The app=
lication of the law to state-owned companies was left deliberately vague, a=
nd it remains to be seen how it will be applied.=0D
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A merger filing in India will trigger a waiting period of up to 210 days, c=
ompared with the typical 30-60 days in the EU and US. India=E2=80=99s busin=
ess leaders, scarred by years of dealing with India=E2=80=99s notoriously i=
nefficient bureaucracy, confidently predict that the competition authority =
will lack the expertise or drive to make early decisions =E2=80=93 especial=
ly in complex cases.=0D
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Mr Shahani says: =E2=80=9CIf these draconian powers had been in place two y=
ears ago then deals such as Tata <http://markets.ft.com/tearsheets/performa=
nce.asp?s=3Din:TATASTEEL> /Corus <http://markets.ft.com/tearsheets/performa=
nce.asp?s=3Duk:CS.>  would never have taken place. Commerce doesn=E2=80=99t=
 wait 210 days. Tata would have lost that deal. The Indian bureaucracy is f=
ar too slow.=E2=80=9D=0D
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One senior investment banker in Mumbai says that the financial community is=
 resigned to the laws having an adverse impact on M&A but adds: =E2=80=9CTh=
e new laws will, sooner or later, stop a high-profile overseas acquisition =
by an Indian company. Then all hell will break loose and the government wil=
l be pressured into changing the regulations.=E2=80=9D=0D
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Enforcement is also a major concern. Turf wars in Beijing have prevented th=
e creation of a designated specialist agency and, until they are settled, t=
he Ministry of Commerce, the State Administration for Industry and Commerce=
 (SAIC) and the National Development and Reform Commission (NDRC) will shar=
e responsibility for enforcement. In a note to clients, Lovells this month =
warned that business was =E2=80=9Cat the mercy of an unpredictable three-he=
aded dragon=E2=80=9D.=0D
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Such a split, in particular between the NDRC and SAIC, could easily cause =
=E2=80=9Cregulatory confusion=E2=80=9D, adds Alex Potter of Freshfields Bru=
ckhaus Deringer. Competition between government bureaucrats is scarcely the=
 kind of competition that the law was passed to promote.=0D
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India has no such dragon, having set up the Competition Commission of India=
 and, more recently, the Competition Appellate Tribunal to hear appeals aga=
inst the orders of the CCI. But business fears that neither body will offer=
 salaries competitive enough to attract the sharpest brains and that both i=
nstitutions will lack experience in dealing with the likely caseloads. The =
tight restrictions governing the ability of global law and accountancy firm=
s to operate in India could add further complexity to some global deals.=0D
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Manish Bahl, a senior lawyer in the India group at Clifford Chance, says th=
e Indian authorities deserve praise for allowing companies to use e-mail to=
 make merger filings =E2=80=93 a world first =E2=80=93 and that the time an=
d cost benefits of using the English language in documents should not be un=
derestimated.=0D
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Thanks to the rise in outbound acquisitions in recent years, Indian and Chi=
nese companies have in recent years become familiar with dealing with antit=
rust regimes across the world. Likewise, leading global companies are used =
to filing for merger clearance in multiple jurisdictions.=0D
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In the final reckoning, however, China and India=E2=80=99s efforts to make =
their respective forms of capitalism more responsive to the needs of citize=
ns will depend on creating a culture of competitiveness =E2=80=93 something=
 no law can do on its own. =E2=80=9CPeople need to be made aware that they =
shouldn=E2=80=99t be talking to their competitors about pricing and other m=
atters,=E2=80=9D says Lui Chun Fai of Baker & McKenzie in Shanghai. =E2=80=
=9CCompetition law is still a very new thing, in China or in Asia generally=
.=E2=80=9D=0D
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Copyright <http://www.ft.com/servicestools/help/copyright>  The Financial T=
imes Limited 2008=0D
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